FHA – IRS Payment vs. IRS Lien – Number of Months of Payments Required

Question:

Our client visited a local IRS office to set up a payment plan. The challenge is that the first payment date on the payment plan isn’t until April, and the loan is set to close in February. I believe the guidelines require one payment to be made on the installment agreement for approval. Can the client make a payment early to satisfy this guideline?

Answer:

This is a confusing topic due to the difference between a “payment plan” and an actual “lien.”

FHA only requires that delinquent tax debt that is a lien have an entire 3-month payment history on the installment agreement in order to be eligible. (See the second guideline below)

Federal debt that is not a lien does not have a requirement for a minimum number of payments (see the first guideline below). You can provide proof of payment, but FHA says “if applicable,” which indicates that a payment arrangement may be new with no payments made yet.

I’ve called the HOC and specifically asked about this, and they’ve said that they only require the three payments when the taxes are a lien. But it would be nice if they would say that in the guidelines, as many underwriters will sometimes require at least one payment on a non-delinquent tax payment arrangement (or sometimes three), even when there is no lien, which is not part of FHA requirements.

To specifically answer your question regarding pre-payment, since technically FHA doesn’t even require payment documentation on a payment arrangement for non-delinquent taxes, I can’t imagine that pre-payment would be a problem unless you are subject to an investor overlay requiring at least one payment. If this is an overlay, you’d have to talk directly with your credit policy folks or the underwriters of your secondary market team to determine what they consider acceptable.

References:

FHA Handbook 4000.1 II.A.4.b.iv.

(D) Federal Debt (TOTAL)

(1) Definition

Federal Debt refers to debt owed to the federal government for which regular payments are being made.

(2) Standard

The Mortgagee must include the debt. The amount of the required payment must be included in the calculation of the Borrower’s total debt to income.

(3) Required Documentation

The Mortgagee must include documentation from the federal agency evidencing the repayment agreement and verification of payments made, if applicable.

FHA Handbook 4000.1, II, A, 1, b, ii, (A)

(12) Delinquent Federal Tax Debt

(a) Standard

Borrowers with delinquent Federal Tax Debt are ineligible. Tax liens may remain unpaid if the Borrower has entered into a valid repayment agreement with the federal agency owed to make regular payments on the debt and the Borrower has made timely payments for at least three months of scheduled payments. The Borrower cannot prepay scheduled payments in order to meet the required minimum of three months of payments. The Mortgagee must include the payment amount in the agreement in the calculation of the Borrower’s Debt-to-Income (DTI) ratio.

(b) Verification

Mortgagees must check public records and credit information to verify that the Borrower is not presently delinquent on any Federal Debt and does not have a tax lien placed against their property for a debt owed to the federal government.

(c) Required Documentation

The Mortgagee must include documentation from the IRS evidencing the repayment agreement and verification of payments made, if applicable.

Subscribers have access to the Judgments – Delinquent Taxes – Installment Agreements – All Agency Comparison Chart, which is on the ‘Charts & Checklist’ page under ‘All Agency.’